Growing controversy over windfall in politics
“Hindrance to financial stability and setbacks against non-performing loans”
ATMs of major banks installed in Seoul. yunhap news
There is growing concern about the recent discussion of the ‘bank windfall tax’ that has been raised mainly in the political world. There is also talk of the possibility that the soundness of banks will deteriorate due to the imposition of a large-scale windfall tax, making the entire financial system vulnerable. There are many opposing voices even within the financial authorities. According to explanations from the Financial Services Commission and others on the 5th, the government and the ruling party have recently been broadly discussing ways to impose a kind of ‘windfall tax’ on banks. Windfall tax is a term that refers to a tax levied on companies that have earned profits exceeding the normal level thanks to changes in market conditions. In Korea, measures to increase banks’ contributions to supplementary finance accounts for low-income individuals are all being considered, including imposing additional corporate taxes. The government, which had expressed a negative stance on the introduction of windfall tax until early this year, appears to be taking a sharp turn after President Yoon Seok-yeol’s ‘servant’ remarks. It is interpreted that as the high inflation and high interest rate situation continued for more than a year and public sentiment deteriorated, the political world took advantage of the bank windfall tax as a card. The logic is that banks have earned more profits thanks to high interest rates than they did during the low interest rate period, so they should reclaim some of this and use it to alleviate the suffering of the common people. In the political world, the fact that some European countries have a precedent of imposing windfall taxes is also cited as a major basis. The problem is that the side effects are likely to be greater depending on the size of the windfall tax and the method of imposing it. First, as investor sentiment toward the banking sector freezes, banks’ funding costs may increase. There is room for the market to shake during this process. In particular, if the loss absorption capacity of the banking sector decreases, the macro soundness of the entire national economy may also suffer. This is also an issue that has already emerged in overseas cases. For example, last August, Italy announced a plan to collect 40% of banks’ latest annual net interest income (NII) as a one-time tax. Immediately after the announcement, the stock prices of major Italian banks fell 5.9-10.8% in one day. In the end, stock prices began to recover only after the government announced that it would reduce the size of the windfall tax to less than half of the previously expected size. Considering the future macroeconomic environment, some say that the risk of introducing a windfall tax cannot be taken lightly. The market believes that as high interest rates and low growth continue for the time being, the number of borrowers who are unable to repay their debt is likely to increase. This means that the amount of money lent by banks and then withdrawn is expected to continue to increase. Major financial authorities around the world, including the Financial Services Commission of Korea, have guided banks to increase their loss absorption capacity by accumulating more capital to prepare for these risks. The windfall tax is also a policy that directly contradicts this policy. In fact, the European Central Bank (ECB) has expressed opposition for this reason whenever there has been a move to impose a windfall tax in countries such as Italy and Spain. There is also great concern within the Financial Services Commission. A high-ranking financial authority official said, “Now is the time to lead banks to better prepare for the situation after next year, but isn’t it time for talk (of imposing a windfall tax)?” Reporter Lee Jae-yeon jay@hani.co.kr
2023-11-05 10:31:17
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